What The Construction Industry Needs To Know About The BC HST Repeal

bc hst repealThis is the final article in the BC HST repeal series featuring commodities tax expert Mike Boven from BDO Canada.

In preparation for the upcoming BC HST repeal, there is one particular rule that addresses construction contracts that the industry needs to be aware of immediately. It mirrors a rule that was in place under the old social services tax that was actually more of a policy or a bulletin, you could say.

When someone is doing a renovation or constructing a building for you, the building itself is going to be considered real property. It’s land and building, aka real estate that is not subject to provincial sales tax but all the materials that go into it are not considered to be part of the building until they are physically installed.

Who Pays Tax On Materials?ID-10038595

The issue becomes who pays PST on the materials that get incorporated into a building since it is technically considered to be ‘tangible personal property’ (we prefer to call it ‘stuff’). Now there used to be a fairly complicated method of doing it determining who pays the PST and it revolved around the structure if it is a lump sum contract to build a building or to improve real property (such as a renovation).

If it is a lump sum contract, then what the contractor is selling is an improvement to real property that is not subject to PST therefore the contractor is considered to be the final consumer of all the materials that are incorporated into it and would pay PST on all the materials.

Time & Materials Contracts

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The other situation would be a ‘time and materials’ contract where the contractor is going to charge you X dollars for all the materials that go into this building and X dollars for all labour and service that go into the installation. What happened then was the two transactions were considered separate so there was a sale of materials (or a sale of ‘stuff’) that is subject to PST that the owner of the property had to pay the contractor. The contractor would then invoice separately for their time or their labour and that was a service that was not subject to PST.

Ultimately PST is just being paid on the materials but it could get very confusing as to who should pay and the result was that a lot of times, when mistakes were made, they were rarely made in favour of the tax department. It’s funny how that works but that’s just sort of the way it goes so there were lots of contracts to improve real property where PST was not paid by anyone.

What The Policy Reflects

What ended up happening was a policy was introduced that is now reflected in the actual legislation that says, “If a contractor has a contract to improve real property”, so that would be either to construct a building or to do a renovation or anything of any kind to a building or to real estate, “The contractor does not have to pay PST on the materials purchased if and only if the contractor purchases the materials for the purpose of fulfilling the contract. Under the terms of the contract, the materials will be used so that they seize to be personal property at common law.”

What that means is when the contractor is done, the materials will be part of the real estate. The contract also has to specifically state that the customer (the home owner or land owner or building owner) will be responsible for the PST on the materials and the contract has to set out the price for the materials.

The Bottom Line

You have to really get your ducks in a row upfront by spelling out that the customer is responsible for the PST on the materials and how much they’re paying. In any other circumstance the contractor pays the PST on the materials and they must absorb the cost.

I don’t expect this will settle much confusion around the topic but this article addresses the most important rule that the construction industry needs to be aware of. There are a substantial number of rules that need to be addressed so make sure you speak with your accountant before the BC HST repeal officially commences on April 1, 2013.

The Complete BC HST Repeal Article Series

I’m very grateful to Mike Boven from BDO Canada for lending his expertise on commodity tax for this article series on the BC HST repeal. Be sure to check out the rest of the articles down below to get a better look at the full picture of what’s happening before April 1.

  1. BC HST Repeal: How We Got Here & Where We Are Headed
  2. What Every Retailer Needs To Know About The BC HST Repeal
  3. Details For BC Business Owners Registering For PST
  4. BC Businesses Should Be Buying Equipment Before April 1st
  5. What The Average Small Business Needs To Know About The BC HST Repeal
  6. What The Construction Industry Needs To Know About The BC HST Repeal

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